Companies Tout Tax Benefits as Earnings Season Begins

Some of the biggest U.S. companies are promising significant annual savings, bigger pension contributions, higher dividend payments and more extensive stock buybacks as executives start to discuss the impact of the federal tax overhaul.

The announcements come as companies begin to report what are expected to be strong fourth-quarter financial results. A major focus will be executives' expectations for how their operations and results this year will be affected by the tax law, which lowered the corporate rate to 21% from 35% and ended U.S. taxes on most future foreign income.

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"The macro environment is as positive as we've seen in many years," Citigroup Inc. Chief Executive Michael Corbat told investors Tuesday morning. "Tax reform could change the sentiment among those making investment decisions from optimism to confidence and become the boost the U.S. economy needs to drive growth higher."

UnitedHealth Group Inc. and FedEx Corp. have raised profit targets for 2018, citing the tax law. Companies including laboratory operator Quest Diagnostics Inc. have predicted sharply lower effective tax rates starting this year. For a few companies, including Citigroup and General Motors Co., the legislation will result in big accounting charges in the current quarter.

Overall, analysts expect S&P 500 companies to mark their sixth straight quarter of earnings and revenue growth. Profits are expected to jump 11.9% over the final quarter of 2016, while revenues are expected to rise 7%, according to a projection from Thomson Reuters. As of Tuesday afternoon, just 30 index companies had reported their latest results.

Corporate profits have been powered by a healthy economic expansion, especially in the U.S. Low unemployment has spurred spending by consumers and improving sentiment and demand have stirred business investment, economists say. A forecast from the Federal Reserve Bank of Atlanta projects 3.3% growth in the gross domestic product for the fourth quarter, well above a postrecession pace of about 2%.

It is a long way from the hopeful but anxious atmosphere that prevailed in boardrooms a year ago. Then, corporate chiefs lobbied Congress and President Donald Trump's fledgling administration, seeking tax cuts, even as some expressed worries that the new president would disrupt global commerce with protectionist trade policies and roil labor markets by tightening immigration.

Executives of Delta Air Lines Inc. recently said they expect business and domestic travel will get a boost from the tax overhaul, in part as companies have more cash to invest in operations. "We haven't seen that materialize yet, but we expect that to materialize in the first quarter, " Delta President Glen Hauenstein told investors Thursday.

Veterinary drugmaker Zoetis Inc. said it expected its effective tax rate will fall to about 21% or 22% this year, from 29% in 2017. Chief Financial Officer Glenn David said the tax overhaul doesn't change the company's priorities, which are reinvesting in the business, pursuing acquisitions and returning capital to investors, in that order.

"But with tax reform, with greater access to cash world-wide, it does give us greater flexibility," Mr. David said.

Even where executives see momentary risks, they say the broader picture remains rosy. Executives at bank holding company Comerica Inc. said Tuesday that lending could slow for a time as the tax overhaul leaves customers with more cash.

"Short term, it could have an impact in terms of lessening the borrowing need," Curtis Farmer, the bank's president, told investors. "But longer term, I think it's very positive for the economy and for the businesses that we work with and certainly for the country at large."

So far, companies have been circumspect about their plans for the savings -- and for how they plan to use more than $1.5 trillion in foreign profits sequestered outside the U.S. that the law makes more accessible domestically.

Drugmaker AbbVie Inc. had accumulated about $29 billion in such profits outside the U.S. as of the end of 2016, its securities filings show. Last week AbbVie executives said they plan to improve employee benefits, contribute more to the company's pension plans and make bigger charitable contributions.

"This will provide increased flexibility for capital deployment, including incremental investments here in the U.S.," CEO Richard Gonzalez said. Still, the company expects to generate far more cash than it can use productively in the business, he added, calling it fair for investors to expect AbbVie will increase the pace at which it pays dividends and buys back shares.

Major stock-market indexes have surged over the past year, hitting record highs as investors anticipate lower rates will bolster bottom lines and shareholder payouts. Some companies have told investors not to expect much from the tax overhaul.

"I can't say for sure that the fact that companies are going to have more cash, they're going to spend more on marketing dollars," CEO Michael Roth of advertising giant Interpublic Group of Cos. Inc. said in a conference presentation last week.

"A lot of these companies were not capital-constrained nor were they cash-constrained, right?" Mr. Roth said. "It's not clear that all of it is going to end up to increase employment and investment in assets or increased marketing dollars -- I think we have to wait and see."

Write to Theo Francis at theo.francis@wsj.com

(END) Dow Jones Newswires

January 17, 2018 05:44 ET (10:44 GMT)